Il “mito” della costituzione aragonese

In February 2001, the Securities and Exchange Commission (SEC) ap-proved a new rule proposed by the New York Stock Exchange and Na-tional Association of Securities Dealers. Under Regulation T margin requirements, all calculations are performed only at the end of a trading day. Thus, a day trader can execute a high volume of trades within a trad-ing cycle ustrad-ing the margin account, and avoid the margin restrictions of Regulation T. So in the event that large losses are suffered by a day trader, it is possible that brokerage firms end up absorbing those losses.

The pattern day trader is anyone who buys or sells a single security within the same trading day (a day trade) four or more times in any con-secutive five trading periods. In addition, to qualify as a pattern day trader, the high-volume activity has to make up 6 percent or more of to-tal trades. (If, for example, you have a large volume of trades but less than 6 percent of the total meets the four-or-more rule, you won’t be classified as a pattern day trader.)

This rule, also known as NASD Rule 2520, comes with a very high margin requirement. Pattern day traders have to deposit and keep mini-mum equity of $25,000 in their accounts; and these funds must be

P a t t e r n D a y Tr a d e r R u l e s 99

broker call rate the rate many brokers charge clients for bor-rowing funds on margin; the rate a firm charges is normally found on the brokerage website.

The pattern day trader rule was established to solve the prob-lem created when day traders opened and closed transactions in a single day. Margin requirements are computed only at the trading day’s conclusion.

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deposited before the high volume trading can go forward. If an investor does not meet this deposit rule, the brokerage firm can impose trading restrictions. For example, your firm can restrict your trading for 90 days to a cash-only basis, thus suspending all margin trading.

If your account violates the pattern day trad-ing requirement, you have five days to satisfy the margin call. This provision, also called the day trade call, may also be subject to a holding period before it can be used for subsequent trading.

Swing trading is an ideal device for avoiding the restrictive pattern day trading rule, assuming that you adhere to the normal timing curve. Setup for transactions normally involves at least three trading days to develop. The swing trading uptrend (made up of three or more days of higher closings and with a series of higher highs offset by higher lows) or downtrend (three consecutive days of lower closings and a series of lower lows offset by lower highs) are the opening side of a swing trade. But because the usual closing setup also re-quires three or more periods in most cases, you have a programmed six-day minimum for a complete buy-and-sell or sell-and-buy transaction.

Because pattern day trading is defined as involving the same secu-rity, in theory a swing trader will never be classified as a pattern day trader. Of course, if you do execute trades more often than the typical swing trade pattern dictates, it is easy to fall into a pattern where you would be classified under this rule. If you have $25,000 in cash and eq-uity in your account, this is not a problem. But if your portfolio value is lower than $25,000, you need to avoid falling into this definition. Lack-ing funds to continue high-volume tradLack-ing, your activity—includLack-ing swing trades—would be restricted by your brokerage firm.

day trade call a requirement that investors deposit funds to satisfy pattern day trad-ing deposit re-quirements based on the volume of trades (four or more trades in the same security within five trading days).

Day trading, with its two- to five-day window, is the perfect strategy for avoiding the pattern day trading rule. By definition, the completion of a trade on both sides requires at least six trading days.

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Under the rule, a “day trade” is defined as a buy and sell of the same security on the same day. This includes pre-market trading, transactions during market hours, and aftermarket trades. If you open a position to-day and close it tomorrow, that is not a to-day trade and activity in this pat-tern can be executed without risking being classified as a patpat-tern day trader. The scope of the rule includes all U.S. brokers who are also mem-bers of the NASD, and covers both stock and option trades. No pattern day trading rules apply to futures trading. The rule is especially applica-ble to options traders who may execute a large volume of trades within a single day on the same security.

While many investors consider being classi-fied as a pattern day trader as a penalty, there is a positive side as well. The day trade buying power is calculated by the brokerage firm as a multiple of an account’s equity, and this may be greater than the allowance for the typical non-pattern day trader’s account. For example, some brokers allow up to four times a day’s closing equity. So if your equity in a trading account is $25,000 and you are a pat-tern day trader, your buying power would be

$100,000 (assuming your broker applies the four-times formula).

The pattern day trading rule was designed to prevent investors from avoiding margin requirements based on Regulation T. Before the rule went into effect, buying power for day traders was virtually unlimited. As long as margin-based transactions were closed by the end of the day, no margin calls were generated. So day traders were able to use extreme leverage to control large positions in securities. The risk was shifted to brokerage firms because if prices moved suddenly (as they have done in single days periodically in the past) there was no way for brokerage firms to enforce margin calls. With $25,000 on deposit, the brokerage firms

P a t t e r n D a y Tr a d e r R u l e s 101

A day trade includes not only trades during the hours the mar-ket is open, but also premarmar-ket and post-marmar-ket transactions on the same day.

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buying power the margin al-lowance a broker-age firm provides to a pattern day trader, which is a multiple of avail-able equity bal-ance in the portfolio.

have some security and many would-be day traders with little or no real equity were eliminated from this kind of trading activity.

Knowing how the trading rules work is useful in picking a broker and in identifying levels of risk. However, swing traders also need to de-termine how they will select stocks for swing trading use. This applies whether you apply the traditional long position (buying stock and hold-ing it, to eventually close the position through a sale) or a riskier short position (selling stock, holding it, and then closing the position with a purchase). The next chapter provides suggestions for picking stocks ap-propriate for your swing trading strategy.

Check the rules imposed by brokerage firms for pattern day trading and margin requirements. If you expect to execute a large volume of transactions, this could be an important deci-sion point.

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Picking Stocks